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Issue of Preference Shares Consultants

SAHU & ASSOCIATES: SECTION- 55 & RULE-9 of the Companies (Share Capital and Debentures) Rules
PREFERENCE SHARES


Definition: Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.

Preference shares are considered as Quasi-debt instruments since they combine the features of equity as well as debt. On one side, they carry a preferential right over the ordinary shares to receive dividend at a fixed rate and on the other, they carry an equity risk of not being secured, except to the preferential right of repayment in case of winding-up of the company.

To qualify as a preference share issue the share must fulfil both of the following conditions mentioned in The Companies Act, 2013:

1. The share carries or will carry a preferential right to be paid dividend of a fixed amount or at a fixed rate which may either be free or subject to income tax AND
2. The shares carry or will carry a preferential right to repayment of capital paid-up or deemed to have been paid-up.

Advantages of preference shares:
1. They enjoy a preferential right to dividend and
2. Repayment of capital in case of winding-up of the company.

Disadvantages of preference shares:

1. Preference shares carry limited voting rights.
2. Preference share carries voting rights only with respect to matters which directly affect the rights of the preference shareholders. However, a preference shareholder may acquire voting rights on par with an equity shareholder if the dividend on preference shares is in arrears.

Checks for issue of Preference Shares:

A. Check whether nominal/authorised capital of company divides into Equity Share Capital and Preference Share Capital.
B. Ensure that there is a Provision in Article of Association of company regarding issue of Preference shares.
C. At the time of issue of Preference shares -
1. There must be no subsisting default in the redemption of preference shares issued. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014.
2. There must be no subsisting default in payment of dividend due on any preference share. (Rule-9(1)(b) of The Companies (Share Capital & Debentures) Rules, 2014.

Conditions for issue of Preference Shares:

A. The Issue must be authorized by passing of Special Resolution in the General Meeting of company.
B. Company requires maintaining a register under Section- 88 (Register of Member) shall contain the particulars in respect of such preference share holder(s).
C. All the checks mentioned above are to be satisfied.
D. Things to be mentioned in the Special Resolution passed for the purpose of Issue of Preference Shares:
i) The priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares.
ii) The participation in the surplus fund.
iii) The participation in surplus assets and profit, on winding-up.
iv) The payment of dividend on cumulative or non-cumulative basis.
v) The conversion of preference shares into equity shares.
vi) The voting rights.
vii) The redemption of preference shares.

Conditions on Preference Shares:

I. As per section 55 of the Act, a company can issue only redeemable preference shares i.e. a company is not allowed to issue irredeemable preference shares.
II. It is mandatory for every company issuing preference shares to redeem it within a period of 20 years from the date of issue.
III. A company may issue preference shares for a period exceeding 20 years for infrastructure projects. Subject to Redemption of a Minimum 10% of such preference shares per year from the 21st year onward or earlier, on proportionate basis, at the option of preference share holder.

Issuance of preference shares, Explanatory Statement should mention following information:

a) Size of the issue and number of preference shares to be issued and nominal value of each share;
b) Nature of such shares must be mentioned.
c) Objectives of the issue.
d) Manner of issue of shares;
e) Price at which such shares are proposed to be issued
f) Basis on which the price has been arrived at
g) Terms of issue, including terms and rate of dividend on each share, etc.
h) Terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
i) Manner and modes of redemption.
j) Current shareholding pattern of the company.
k) Expected dilution in equity share capital upon conversion of preference shares.


STEPWISE PROCEDURE ISSUE OF PREFERENCE SHARES



 
   
   
   
 


















































SL. No.STEPSSections / Rules/ E-forms/ Time Period
A Call the Board Meeting Issue Notice of Board Meeting to all the directors.
B Hold Board Meeting. 1. Check the quorum of Board Meeting

2. Approve right issue including "Letter of offer", which shall include right of renunciation also.

3. Issue Notice of General Meeting.
C Hold EGM(Extra Ordinary general Meeting). 1. Check the quorum of Meeting

2. Present Offer Letter.

3. Pass Special Resolution for issue preference of shares.
D File e-Form- MGT-14 with Registrar File the form with ROC.
E Circulate Letter of Offer 1. Through registered post or speed post or through electronic mode to all the existing share -holders at least three days before the opening of the issue.

2. Offer shall be open for period not less than 15 days or not more than 30 days.
F File e-Form- MGT-14 with Registrar 1. File MGT-14 with Registrar.

2. Attachments:

3. Notice of General Meeting along with Explanatory Statement

4. Certified True copy of Special Resolution.

5. Minutes of General Meeting
G Call the Board Meeting Issue Notice of Board Meeting to all the directors.
H Hold Board Meeting
In List of allottees: Mentioning Name, Address, occupation if any and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the form PAS-3.
1. Check the quorum of Meeting(Section-103).

2. Approve allotment by passing of Board Resolution. And present list of allottees before the Board

3. Pass resolution for Issue of share certificates.

4. Authorize to two directors and one more person for signature on Share Certificates.

5. Authorize a director to file E-form PAS- 3(Return of Allotment) to ROC within 30 days of passing of Resolution
I File e-Form- PAS-3 with Registrar. 1. File PAS-3 within 30 days of passing of resolution for allotment of shares.

2. Attachments:

3. Resolution for allotment of Shares.

4. List of allottees.
J Issue Share Certificate Issue Share Certificate in form SH-1 within 2 months from the date of allotment of shares.


IMPORTANT POINT TO BE KEPT IN MIND WHILE ALLOTMENT OF PREFERENCE SHARES
1. Make Allotment within 60 days of receiving of Application Money; otherwise it will treat as deposits as per deposits rules.
2. Issue Share Certificate under form-SH-1
3. Make Entry of allotment of Preference Share under Register of Member maintained in Form No. MGT-1.

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Issue of Preference Shares Consultants